The International Association of Currency Affairs (IACA) held a webinar recently to discuss how sustainability is, and can be, incorporated into tenders by central banks. Purchasing power is, of course, a powerful lever for achieving policy goals.
Two central banks were on the panel, the Bank of England (Andrew Baker) and the Dutch National Bank (Jan-Mark Geusebroek and Annemieke de Gooijer), along with two banknote suppliers, De La Rue (Nikki Strickland) and Orell Füssli (Karim Shoukry).
There were five topics in the presentations and discussion that followed.
What weighting in tenders should be given to sustainability? This is in the context of the burden it puts on suppliers to respond and the real cost that some environmental choices add to the price of a product, particularly relative to the total price.
Where should the focus be? For example, should a central bank tender focus on one or a small number of environmental areas (eg. the Dutch National Bank focused on the use of sustainable cotton and the Bank of England on CO2 emissions) or touch on the full range of environmental impacts, eg. CO2, energy, waste, water etc?
How to get a sense of how serious a company is. Should ‘sustainable pathways’ be the priority, ie. the approach of the organisation to doing better? Can a central bank really understand and evaluate the supplier’s ‘sustainability pathway’ and assess whether it is truly sustainable? And express this in a measured way that stands up in court.
How do you create a level playing field between suppliers? What about absolute tender ‘scores’ against set criteria compared with discretionary environmental investments made or the culture of the organisation? What metrics should be used, whether for Environmental Social Governance (ESG) reports or performance reporting? To ensure comparable results, how does a rating agency-provided score, for example one by Eco Vadis, compare with Climate Disclosure Plan or Science Based Target initiatives results? How do they compare? Are some better than others?
If you are a small organisation, whether central bank or another stakeholder in the cash cycle, what is the minimum to include / do? You may have very limited internal expertise or resources and choices may have to be made.
While tenders for repeat orders are one thing, what about designing new banknote series? Can you have product impact production tools? Can you challenge suppliers to compete to produce lowest impact secure designs?
The BOE issues a Climate-Related Financial Disclosure report each year. This includes detailed information on its currency and cash cycle environmental impacts. This is the context for its tenders for the purchase of polymer substrate, and the focus has to date been heavily on carbon emissions.
In its tenders the BOE gives sustainability a weighting of 20%. It had a transparent process with a score card for environmental factors such as the carbon footprint, carbon reduction targets, projects in progress and planned, and non-environmental factors such as modern slavery and workforce diversity.
For all of the factors in the tender, bidders had to provide evidence both for their answers and their ability to manage the contract and to their technical ability to deliver on promises. The BOE wanted to be an ‘intelligent customer’, and this meant being prepared to have active engagement with suppliers both during the tender process and afterwards.
In this context, the BOE audited the frameworks, requiring carbon certificates and other evidence. The baseline carbon footprint had to be independently audited. PAS2050 was used for measuring carbon emissions. BOE required an Eco Vadis rating. Suppliers have agreed to offset any remaining carbon emissions.
In each tender the BOE’s focus has shifted. BOE is putting the onus on suppliers to come up with ideas for improvement. The BOE also encouraged De La Rue to manage its suppliers, including auditing them.
Scores were fed back to bidders. The BOE used its own independent auditors from outside of the cash department to validate responses.
The BOE is now conducting a full Life Cycle Assessment to inform its future work and focus.
DNB has been working on sustainability for a number of years. Its focus has been on moving to 100% sustainable cotton in its substrate. It has moved towards this steadily over time.
The weighting given to environmental factors is 5%, and DNB believes this has been enough to change supplier behaviour.
The tender consists of a number of mandatory requirements, ie. if you don’t comply you are disqualified, and areas for which preference points are awarded include green energy, more sustainable packaging and the calculation of the CO2 footprint. The mandatory requirements are 100% sustainable cotton and an annual meeting on sustainability.
DNB is willing to accept higher prices to achieve its environmental goals, although there is no evidence this has happened to date. It is now asking for evidence on environmental innovation from suppliers and more focus on environmental processes and product.
Sustainability is trendy and is part of the agenda now, which means it increasingly appears in tenders. It is often though, just a tick box exercise, more of a hygiene factor rather than being a core part of the tender.
The scoring assigned to environmental answers is often not transparent, neither the weighting nor the result. In addition, the response to the environmental questions does not result in suppliers being disqualified. When considering what weighting to assign to environmental questions, perhaps look at the price range in previous tenders. If you want something to drive supplier behaviour, a weighting that would change the result will do that. Anything less will have a lesser priority.
The result of this is that the time taken to respond to environmental questions does not feel like time well spent. This is important given that responding to environmental questions does take considerable time, perhaps 15% of the time the total tender response takes. One reason they take so long is that tender questions are seldom ‘yes’/’no’ and so are not precise. They are often along the lines of what are you doing and what impact are you having.
Many tenders ask for information on the CO2 footprint. This is calculated rather than using real measurements, casting doubt on its real value. Standardisation of what is required and the methodology to be used would be helpful.
ESG reporting is a paper exercise. While it does help with responding to tenders because much of the data has already been collated, its real value is limited.
The advantage of external measures, rather than just an organisation providing their own measurements, is transparency and comparability. Eco Vadis offers an entry level rating, but the Carbon Disclosure Project (CDP) and Science Based Target initiative (SBTi) are much more sophisticated. Even with the best standards, there can be massive variability when being applied internationally.
An important question is what does the next level of performance look like?
Orell Füssli would like to see customers asking about how a supplier would design a sustainable product. Production in the industry is pretty much standardised given that organisations generally have the same equipment, same inks, prescribed substrate etc. What difference can the supplier make? Can it design a sustainable product and deliver security, durability, circulation performance, aesthetics etc?
Designing a banknote to have the optimum environmental impact throughout its life is what matters. Orell Füssli is working on a tool that predicts the CO2 impact of different product specifications.
The need for measurement and the ability to compare the sustainability of suppliers and products is clear, but there remains work to do to agree a straightforward way to achieve this.
